Colon Pharmaceutical is a highly specialized innovative pharmaceutical group covering various key areas such as major infusions, generic pharmaceuticals, API intermediates, and innovative drugs. Under the company's three-pronged strategy, products in the large infusion sector continue to be upgraded, and the leading position is stable; new non-infusion generic drugs have been introduced, and the product matrix continues to be enriched; Chuanning is leading the bioantibiotic API intermediates market, laying out a new growth curve in the field of synthetic biology; Colon Botai's ADC technology is leading, and various products are progressing at the forefront of the country. Cooperation with MSD accelerates product globalization, and innovative research and development is about to enter a period of performance realization. In summary, we used the absolute valuation method and the relative valuation method to estimate that the company's reasonable equity value in 2023 was 59.608 billion yuan, and the corresponding target price was 40 yuan. Coverage for the first time, and a “buy” rating was given.

Under the three-pronged strategy, the company accelerated innovation and transformation from a traditional large infusion company. The company has always implemented the “three-engine drive, innovative growth” development strategy, that is, first step: maintaining Colon's leading position in the field of infusion through continuous industrial upgrading and variety restructuring; second step: building a competitive advantage in antibiotics from intermediates, APIs to formulations through innovative development and utilization of high-quality natural resources; third: building the ultimate driving force for the long-term development of the enterprise through R&D system construction and diversified technological innovation. With the successful spin-off and listing of Chuanning Biotech and Colon Botai, Colon has thus formed an operating pattern supported by three major “product” capital platforms.

The company is growing steadily, and operating efficiency is steadily improving. Under the company's three-pronged strategy, the large infusion sector has developed steadily, the Chuanning project has been gradually implemented, and innovative research and development results have been fruitful. In 2023, the Q1-Q3 company achieved operating income of 15.743 billion yuan, +12.93% year-on-year; realized net profit of 1,963 billion yuan, +39.70% year-on-year; and realized net profit of 1,922 billion yuan, +40.14% year-on-year. The company's 2023Q1-Q3 sales/management/finance expense ratio was 20.64%, down 3.65pcts from 24.28% in the same period in 2022.

Big infusion: The product continues to be upgraded, and the leading position is stable. China's large infusion market is mainly concentrated on several leading enterprises, and supply and demand in the industry are basically stable. In 2022, the company's large infusion sales revenue reached 9.451 billion yuan. We predict that the company's market share in the major infusion sector will exceed 30%. The company's infusion product structure continues to adjust, and the proportion of closed rooms continues to rise. Innovative products such as three-chamber bags for parenteral nutrition and double chamber bags for powder have been approved one after another, maintaining its core competitiveness in the infusion formulation sector. At the same time, the company actively participated in large-scale local infusion collection and continued to increase market share in corresponding regions. Among them, three chamber bags and powder double chamber bags will participate in the 2023 health insurance negotiations, and powder double chamber bags are currently in short supply. Production of new production lines in 2024 is expected to achieve rapid expansion. There is still room for continued upward growth in the company's large infusion sector.

Non-infusion generic drugs: Continue to promote generic drug business and actively embrace policy changes. “Replication drives innovation, innovation drives the future” is an important development strategy for the company. Since the transformation in 2013, the company's generic drug research and development has successfully transformed from simple infusions to comprehensive, comprehensive, and content development. 410 generic drug studies have been launched one after another, and 152 products have been approved. Although sales of non-infused preparations declined in 2023H1 due to multiple external factors such as national and local collection, sales of plastic water injections still increased significantly; emglesine, tofacitib, ambroxol injections, injectable ceftriaxone, ceftadime, roxithromycin tablets, etc. also achieved sales volume. These new generic varieties will become new growth points for the company's subsequent non-infusion drug sector.

Chuanning Biology: An industry leader in the field of antibiotics, building a platform for the synthetic biology industry. Chuanning Biotech is a core enterprise in the field of antibiotic intermediates. The company's production of erythromycin thiocyanate, cephalosporin intermediates (7-ACA, 7-ADCA, D-7ACA), and penicillin intermediates (6-APA, penicillin G potassium salt) ranked among the highest in the country. The company pioneered the application of high conversion rate biological fermentation and extraction technology in the industrial production of antibiotic intermediates. Currently, the production capacity and output of related products have reached a high level. In Q1-Q3 of 2023, benefiting from strong production and sales of antibiotic intermediates and revenue from new synthetic biology products, Chuanning Biotech's business conditions maintained a good trend, achieving revenue of 3,581 billion yuan, an increase of 21.83% over the previous year; net profit of 640 million yuan, an increase of 92.65% over the previous year. At the same time, the company is actively building integrated synthetic biology R&D and production capacity. The Shanghai Research Institute has already delivered products such as bisabolol, 5-hydroxytryptophan, and ergothione. Synthetic biology is expected to become the second growth curve for Twinning biology.

Colombo Thai: A pioneer in the field of ADC that shines internationally. Colon Botai is an international biotech with leading ADC technology. Currently, 14 drugs are in the clinical stage, 5 of which are in critical trials or NDA registration. The core product, SKB264, is a domestically produced TROP2 ADC with the fastest development progress. It lays out TNBC, HR+/HER2-BC, eGFRM NSCLC, and other indications that do not meet clinical needs. We predict that it is expected to become a major variety with global terminal sales of nearly 5 billion US dollars. HER2 ADC, PD-L1 monoclonal antibody, and cetuximab analogues have all been submitted for NDA, and R&D results are gradually being realized. The company has cooperated deeply with international giant MSD, and its technical strength has been recognized by international MNC to accelerate the global layout of products. The innovative pharmaceutical sector will be an important driving force for the company's long-term performance.

Risk factors: risk of changes in industry policies exceeding expectations; risk of sharp decline in product sales prices; risk of centralized procurement of drugs across the country; environmental risk; risk of increased market competition; risk of increased market competition; risk of innovative research and development.

Profit forecasting, valuation and ratings: Colon Pharmaceutical is a highly specialized innovative pharmaceutical group covering various key areas such as major infusions, generic pharmaceuticals, API intermediates, and innovative drugs. Under the company's three-pronged strategy, products in the large infusion sector continue to be upgraded, and the leading position is stable; non-infusion generic drugs are constantly being introduced, and the product matrix is constantly being enriched; Twinning is leading the bioantibiotic API intermediates market, laying out a new growth curve in the field of synthetic biology; Colon Botai's ADC technology is leading, and a variety of products are at the forefront of the country. Cooperation with MSD accelerates the global layout of products, and innovative research and development is about to enter the performance period. In summary, we used the absolute valuation method and the relative valuation method to estimate that the company's reasonable equity value in 2023 was 59.608 billion yuan, and the corresponding target price was 40 yuan. Coverage for the first time, and a “buy” rating was given.